Targeting Subsidies: Employers versus Individuals

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Abstract

Recent congressional proposals and reforms advocated by the presidential candidates have renewed the debate about whether the problem of the uninsured is best addressed through subsidies to employers or to individuals. In this brief, the authors argue that it is more efficient to provide subsidies directly to individuals and families than to employers. Individual subsidies will lead to less displacement of private spending and will be more equitable. Employers have limited information about their workers, making employer subsidies more difficult to target to individuals with the greatest needs. In addition, employer subsidies do not eliminate the need for individual subsidies.

Introduction

Dramatic and persistent coverage disparities between workers in small and large firms and between lowand high-income workers have led to years of debate over whether the issue of uninsured Americans would be best addressed by subsidizing small employers or by subsidizing low-income individuals themselves. This brief delineates the important advantages of subsidizing individuals and families, as opposed to employers, in achieving the goal of reducing the number of uninsured by providing targeted financial assistance to those most in need.

Individual subsidies to the low-income population lead to less displacement of current private spending and eliminate the inequities that result from subsidizing workers differently as a function of their workplace choices. However, individual subsidy programs must take into account and plan for potential declines in the likelihood that individuals will obtain their health insurance coverage through employment settings.

The introduction of bipartisan Senate legislation earlier this year has brought this debate back into sharp focus. The Senate bill, the Small Business Health Options Program (SHOP) Act of 2008, introduced by Senators Richard Durbin (DE), Olympia Snowe (ME), Blanche Lincoln (AR), and Norm Coleman (MN), would provide annual tax credits to the self-employed and to employers of up to 100 workers to offset the cost of providing coverage to their workers.1 In addition, it would create a health insurance purchasing pool through which small employers and the selfemployed could purchase affordable health insurance. The central issue is whether this legislation would make for sound policy or whether resources would be better targeted to low-income individuals, those most likely to have problems affording coverage.

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